Interest rates

All systems opt for the Fed raising interest rates

By Howard Schneider

WASHINGTON (Reuters) – The Federal Reserve will shut the door on its ultra-loose pandemic-era monetary policy on Wednesday and step up the fight against stubbornly high inflation with the first of what is expected to be a series of rate hikes. interest this year.

The change, which begins with a planned quarter-percentage-point hike in the U.S. central bank’s benchmark overnight interest rate, has been in the works since last fall and has already pushed up the cost of lending. mortgages and other key types of credit in anticipation of what the Fed will do to rein in prices that are rising at their fastest pace in 40 years.

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Still, the urgency surrounding the Fed’s policy meeting this week has intensified as inflation has shown no signs of slowing and may even rise further following the Russian invasion of Ukraine, which has fueled a spike in oil prices this month.

The precise language of the Fed’s new policy statement and the details of the updated quarterly economic and interest rate projections will provide the first concrete indications of how all of this has influenced policymakers, and in particular s ‘it has shaken faith that the current economic expansion can continue. follow even as inflation is pulled lower.

Fed Chairman Jerome Powell, speaking to congressional lawmakers earlier this month, said it was “more likely than not that we could achieve what we call a soft landing…which comes down to controlling inflation without recession”.

But he also acknowledged that the central bank was on uncertain ground, perhaps more reminiscent of the high inflation era of the 1970s than the low inflation backdrop that has shaped monetary policy since the early 1990s.

“We haven’t faced this challenge in a long time,” Powell said in testimony before the U.S. House of Representatives Financial Services Committee. “But we all know the story and we all know what we have to do.”

The new projections due to be released alongside the policy statement at 2:00 p.m. EDT (6:00 p.m. GMT) will show how aggressive officials think they may need to be and whether policymakers see the target federal funds rate increase to the kind of restrictive levels that could actually crimp the economy and increase unemployment.

Since the financial crisis and recession of 2007-2009, the Fed has implemented these kinds of restrictive policies only once, in response to former President Donald Trump’s increased deficit spending in 2017 and 2018, but rates have never risen so high before the economy. started to curl.

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Inflation is now the motivation. The Fed’s preferred gauge for price pressures is currently rising at an annual rate that is triple the central bank’s 2% target, and the war environment, rising energy costs and rising wages drew parallels with the 1970s and early 1980s, when the Fed pushed the economy into recession to break the cycle.

If the COVID-19 pandemic has led to an unpredictable economy, developments in Europe have made the situation almost byzantine when it comes to forecasts.

The price of US West Texas Intermediate crude, for example, rose about 33% to $123 a barrel in the days following Russia’s February 24 attack on Ukraine. By Tuesday, it had fallen back to around $95 a barrel, close to its pre-war level.

But that drop was largely due to new coronavirus-related lockdowns in China which could cause their own economic problems – including increased inflation.

The situation “couldn’t be worse for the Federal Reserve, which is already chasing inflation for the first time since the 1980s. chef at GrantThonton. .

Powell “will be walking a tightrope, balancing the need to raise rates and rein in a more systemic rise in inflation with the need to avoid a meltdown” if the central bank were to raise rates so quickly that it would risk a recession, she added.

AN “AGILE” APPROACH

Powell is due to hold a press conference half an hour after the release of the policy statement and projections. In addition to giving details of the statement, he will likely provide an update on discussions on when and how quickly to reduce the portfolio of around $8.5 trillion in government bonds and equity-backed securities. Fed mortgages, a second monetary policy tightening tool that will be rolled out. Later in the year.

Powell used words like “agile” to describe his approach to a situation in which policymakers might have to adapt on the fly, and in which they were repeatedly misled by economic developments, from a more faster than expected to the slow return of workers to jobs.

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The language of the new policy statement and the details of the new projections, however, will highlight the Fed’s broader thinking.

In December, most Fed officials believed they could bring inflation under control with a relatively light touch that involved raising the federal funds target rate, currently near zero, to just 2.1% by the end of the month. 2024, a level still not considered restrictive by policy makers.

But policymakers at the time also estimated that inflation for 2022 would be just 2.6% and that it would be down as the US and global economies ironed out supply chain and supply chain issues. other problems created by the pandemic – a perspective that also turns out to be off.

Given the level of inflation, “the message must be at least somewhat hawkish,” Evercore ISI analysts Krishna Guha and Peter Williams wrote, though volatile events in recent weeks mean officials will also want to stress “that now more than ever nothing is set in stone.”

(Reporting by Howard Schneider; Editing by Paul Simao)